About TLB

Philip Jessup proposed the idea of a transnational law course. His vision of the subject was broad, including public and private international law; state and non-state actors; business, administrative, and political affairs; as well as negotiation and litigation. Inspired by his idea, TLB is only constrained by its pursuit to address all law transcending national frontiers.

November 18, 2009

Today, in an interview with Fox News in
Beijing, President Obama warned
that “the US economy could head into a ‘double-dip recession’ unless urgent
steps were taken to rein back America’s mounting level of public debt,” reported the Financial Times. Speculation
about a double dipping, also known as W shape economy, has been on going among
academics ever since the US economy showed signs of recovery. I have long been
argued that there will be a U shape recovery- a sluggish recovery but not
another recession- and 2010 will be an adjustment period where real recovery
will occur closer toward the end of 2010.

At the moment, the effects of the fiscal
stimulus will soon phase out at the end of this year and will probably finish by early
next year barring any additional stimulus. Thus, 2010 means to be a deciding
year for the shape of the U.S. economy, depending mostly either on the
economy’s ability to recover on its own by increasing productivity and
producing new jobs or on further government intervention to artificially boost
the economy once again. I suspect both of these factors must occur concurrently for a stronger and real recovery to happen.

Let us set aside the first factor of
self-recovering economy. Instead, let’s think about potential government
intervention for a moment. Given the U.S. on-going commitment in the Middle
East, namely Afganistan, Iraq and recently Iran, as well as the newly proposed
health reform, the Obama administration has less latitude to ask Congress for
another major stimulus package. This is not to mention the moral hazard issue posed by this approach. One of the remaining options is to stimulate the U.S. economy by increased trade volume, hence devaluation of the U.S. dollars.

In his recent interview with NBC news,
president Obama asserts: “If we just boosted our share of exports by 1 per
cent, that might be 250,000 well-paying jobs in the United States.” “So export
promotion would be an example of something we could do without spending money,”
quoted the Financial Times.

One major problem of this strategy is that the U.S. largest
trade partner who currently benefits from enormous trade surplus with the U.S. is China. In response to the depreciation of the dollar against
other major currency, Chinese government immediately pegged the yuan to U.S. dollar
causing the yuan to depreciate even further than its artificial rate. The new peg effectively
deflects the U.S. effort to stimulate U.S. trade volume with China. There is,
indeed, an urgent need for President Obama to pay Asia a visit to prevent
further distortion behavior from the Chinese exchange regime.

I found China’s new
tactical complaint that “low US interest rate were fuelling a new global
asset bubble based on the carry trade in US dollars” disturbing. In order to
keep the dollar value low, interest rate must remain low. Economically, the
devaluation of the dollar has two major negative impacts on China: increased
trade pressure and decreased value of Chinese dollar reserve. Being the largest foreign
holder of U.S. treasury bonds with roughly $800b on its books, China is seeing
the value of its dollar assets depreciate with the dollar. Nevertheless, how
could a government, which consistently devaluates its currency to earn comparative
advantages on global trade criticizes the exact behavior done by its major trade partner? How about
Chinese government allowing the yuan to adjust to its real value by floating its currency
first?

Dani Rodrik was right
that global protectionism was held back this during the 2008-2009 recession,
but it is making a come back leading by China, the U.S. and is slightly followed
by the rest of Asia. Unless we see better economic recovery and proper governing
effort on trade protectionism, Europe and the rest of the world will soon join
the league.

To add more complexity to the US- China diplomatic environment over
trade issues, did you know that China exchange regime may in fact complies
with the IMF Articles and the relevant provisions of the WTO?

On a separate and more positive note: U.C. Hastings was rated 11th
in the nation based on Super Lawyer Magazine’s new ranking. The Wall Street
Journal Law Blog posted about the new ranking system here.

--Images by the Wall Street Journal (Balancing Act) and the Financial Times (Chinese Renminbi).